Resolving Issues at the Local Tax Services Offices: A Three Step Process

Step One – The Obvious: Speak With Your RTA

It goes without saying, the first step is to speak with the person reviewing your file. Misunderstandings are frequent and it may be as simple as using the same term with two different understandings of what it means (“constructs” will be dealt with in a later post) or due to a lack of information. Ask for a clear assessment in writing so you can better understand the situation. There may be requests from the CRA for more information, to meet with additional staff, or arrange for additional meetings – all of which have varying degrees of effectiveness depending on your reviewer.

Did you know? It’s your right to get your assessment in writing. Let’s be honest: English (or French) are imperfect languages. It’s impossible to work to resolve issues without a clear understanding of where the issues have arisen.

Before moving on to the next step, make sure that you have all of the information at your disposal. This both allows you to better understand the reasons for the assessment of “ineligible” and discuss them with your RTA. This will allow you – the claimant and taxpayer – an opportunity to respond in writing to any misunderstandings or incorrect applications of the law by providing clear and concise evidence. All of this becomes critical later on. Make sure that everything is in writing and that you provide as much as possible in this format, following the guidance of your SR&ED champion (in-house or external).

You may be pleasantly surprised by the outcome of this simple step!

NOTE: In an ideal world, this would work most of the time. Often when a claimant gets a call or receives a draft report which indicates their claim has been denied in full without a clear or comprehensive explanation, the relationship quickly breaks down and mediation is required. This is when the next step is required.

As a first step to resolving any concerns, the claimant should talk to the RTA and/or FR about their concerns as soon as possible. Issues often arise because of a misunderstanding of the facts of the claim, or a lack of information. To clarify the issues, the claimant may be asked to provide more information, to meet with the SR&ED staff, or to arrange for additional site visits. By openly discussing the eligibility and financial issues and clearly presenting the facts, often the concerns can be resolved to the satisfaction of all parties.

Step Two – Discuss with the Manager

If your seem to be getting nowhere, the next logical step is to identify and contact the Research and Technology Manager (RTM) and/or Financial Review Manager (FRM). In most government agencies it’s possible to look up the manager using Government Electronic Directory Services (GEDS); however, this tools seems to be ineffective for navigating the SRED offices. Calling the local SR&ED office and ask for the name and contact information for the RTM/FRM is much quicker.

In theory, the RTM and/or FRM “will review the facts of the case and consider the claimant’s perspective on the issues, as well as those of the RTA and/or FR” and “(t)he RTM and/or FRM will work with the claimant and the RTA and/or FR to resolve the concerns.” [Source: 3.2 Concerns with a Review]

NOTE: The outcome of this stage will depend on the manager that has been assigned to the file. As with any department, some are more helpful than others. Keep an open mind and communicate in writing.

As noted above, when an RTA has made a determination on the eligibility of a claim to the SR&ED program, that decision is communicated to the claimant in a Technical Review Report. In the course of consultations we held with SR&ED claimants during our investigation, we heard claims that the Technical Review Reports prepared by RTAs did not always provide sufficient explanations of why a claim had been determined to be ineligible or partially ineligible. As a result, some claimants said they lack confidence in the correctness of CRA decisions about eligibility for SR&ED incentives.

According to the CRA’s Claim Review Manual section 6.8.6.1 – Documenting Determinations Concerning Issues of Eligibility, “Determinations of eligibility should be documented to avoid misunderstandings or ambiguity, and to demonstrate that they are based on the Income Tax Act and CRA policies.” The CRA policy stipulates that the RTA should explain the reasons for the decision on eligibility in the Technical Review Report, citing a combination of facts, legislation, and policy, that enables the claimant to understand the decision.

Section 6.8.11 of the CRA’s Claim Review Manual provides that an RTA’s Technical Review Report will be reviewed by an RTM in certain situations to ensure quality. The manual suggests that reports be reviewed by the RTM in these situations:

the claim is found completely ineligible or substantially ineligible;

there is a significant change in eligibility of claimed work from the prior year’s review;

the claimant does not concur with the RTA’s findings; or

the scope of the actual review is significantly different from what was planned based on the issues identified during screening and risk assessment.

Investigators from our Office did, however, review several excerpts from a sampling of SR&ED Technical Review Reports. We observed that there do indeed appear to be variations in the quantity and quality of explanations provided to claimants in these reports.

In most cases, the RTAs did justify their decisions, to varying degrees, and the majority provided sufficient information to support their decisions.

In some of the reports we reviewed, however, RTAs simply stated that the claim did not meet the criteria of the Income Tax Act without explaining in a clear and complete manner how the decision was arrived at. This is an excerpt from one such Technical Review Report: “Designing a XYZ is not considered an attempted technological advancement. The work is not considered to be performed for the purpose of achieving technological advancement and therefore it does not meet subsection 248(1)(c) of the Income Tax Act.”

Through its own internal reviews, the CRA has also noted the failure of some RTAs to consistently provide an adequate explanation of the reasons for their determination that a claim is ineligible for the SR&ED program.

The CRA acknowledged to us that simply referring to elements of the work as “standard practice,” “knowledge commonly available to the industry,” “routine testing,” “routine engineering,” or making statements such as “the work does not contribute to an advancement in a field of science or technology,” without adequately explaining why the work has been found to have those characteristics, would not be defensible should the claimant decide to appeal the decision by filing a Notice of Objection. The Technical Review Report should always cite the evidence or information that led the RTA to determine that the work did not qualify for the SR&ED program.

Observation

The Taxpayer Bill of Rights entitles taxpayers to complete, accurate, clear, and timely information. It also provides that taxpayers can expect the CRA to be accountable, and as the Ombudsman reported in The Right to Know, that means that the CRAhas an obligation to explain its decisions.

A Technical Review Report that does not contain a sufficient explanation of the reasons for the decision on ineligibility infringes upon the claimant’s taxpayer service rights. The absence of an adequate explanation about why a claim is ineligible is unfair to the claimant, who is then not in a position to contest the finding. It also diminishes CRA accountability. The failure to provide adequate reasons for decisions creates doubt about the RTA’s decisions and the integrity of the SR&ED program as a whole.

RTMs are considered the last line of quality control before the eligibility decision is presented to the claimant in the form of the Technical Review Report. Seeing an opportunity to ensure quality by expanding RTM oversight of the work done by RTAs, one Tax Services Office in the Ontario region has implemented a peer review process for Technical Review Reports within the CRA. If feasible, the CRA may do well to consider implementing this practice nationally.

In summary, if you haven’t received a clear explanation of why your work has been deemed ineligible, it is appropriate to address your concerns to the RTM. Should you not be able to receive an explanation from the RTM that meets your rights as a taxpayer, it is important to consider the next steps.

Step Three – Request an Administrative Second Review

This is where things start to get interesting, and most companies are not aware that this process exists or how best to access it (despite the requirement for RTAs to notify the taxpayer of recourses available to them). In fact, the Taxpayers Ombudsmans recently released a report that stated in relation to an Administrative Second Review (ASR):

…SR&ED claimants would benefit from a better understanding of the ASR; namely, what it is, when it is granted and what it involves. Taxpayers would benefit from enhanced communication and outreach from CRA aimed at raising awareness and understanding of this important step in the claim review process.

If the claimant feels that their concerns have still not been satisfactorily addressed, they can request an Administrative Second Review (ASR). An Administrative Second Review determines whether the SR&ED laws and policies have been correctly applied and if the claimant has been given due process.

In order to initiate an Administrative Second Review, the claimant must make their request in writing to the SR&ED Assistant Director. In their request, the claimant should explain why they want an Administrative Second Review and should provide relevant facts and documentation to support their case.

An Administrative Second Review is usually conducted by the SR&ED Assistant Director. However, the Assistant Director can delegate this responsibility to another person in the SR&ED program who was not previously involved in the case.

The Assistant Director will begin the Administrative Second Review by collecting and reviewing all the relevant information received from the parties involved, including details of the claimant’s concerns, the RTA’s and/or FR’s positions and any additional facts and documentation submitted by the claimant. If the Assistant Director considers the information to be incomplete or unclear, he or she may request additional information or clarification from the parties.

If the claimant submits additional information with their request for an Administrative Second Review, the RTA and/or FR, at the discretion of the Assistant Director, may be asked to review the additional material and to determine if it addresses the issues. If it does, the RTA and/or FR will revise their decision accordingly.

When conducting an Administrative Second Review, the Assistant Director will determine whether:

• the SR&ED technical and financial reviews were consistent with the current SR&ED legislation, application policies, and guidance documents; and
• the claimant was given due process.

In determining whether due process was given, the Assistant Director will decide whether:

• the claimant was given reasonable opportunity and time to explain the work and/or expenditures claimed;
• the RTA and/or FR asked for clarification of the issues, and whether the request was clear;
• the claimant was given reasonable opportunity and time to provide additional information;
• the RTA and/or FR considered all the information that was submitted by the claimant;
• the RTA and/or FR clearly explained to the claimant why the work and/or expenditures claimed were not eligible;
• the claimant was given a report which included the eligibility decision of the claimed work and an explanation as to why the work was not eligible; and
• the claimant was given reasonable opportunity and time to respond to the report.

They go on to make sure the reader is 100% clear regarding the role of an Administrative Second Review (ASR):

An ASR is not a second technical review and it is not part of the appeals process. It is simply an administrative review of the relevant information within the coordinating Tax Services Office to ensure that the claimant was given due process and that the SR&ED technical and financial reviews were carried out in a manner consistent with the relevant legislation, policies, and guidance documents.

Based on the Assistant Director’s determination, there are two possible outcomes of the Administrative Second Review: Decision Maintained or Decision Reconsidered.

i. Decision Maintained

If the Administrative Second Review reveals that the SR&ED technical and/or financial review was consistent with the current SR&ED legislation, application policies and guidance documents, and that the claimant was given due process, then the technical and/or financial review will proceed in the usual manner. The claimant will be advised of this outcome in a letter from the Assistant Director.

ii. Decision Reconsidered

If the Administrative Second Review indicates that the SR&ED technical and/or financial review was not consistent with the current SR&ED legislation, application policies and guidance documents, and/or the claimant was not given due process, then further action will be taken to address the Assistant Director’s findings. For example, if the claimant was not given a reasonable opportunity to provide additional information to support their claim then the opportunity to do so will be provided. The claimant will be informed of this outcome in a letter from the Assistant Director.

Commentary Regarding Administrative Second Reviews

Many feel that this step does not provide any value unless there have been serious errors on the part of the RTA in the processing of your claim. In their article The Appeals Process in the Scientific Research and Development Context (Tax Litigation. 2010. Volume XVII, No. 3), Michele Anderson and Couzin Taylor question the usefulness of an Administrative Second Review “as it is likely to be performed by a science reviewer at the same Tax Services Office”. When we think back to our original post which asks the reader to take time to understand the mindset of the CRA, it is helpful to also think about the work environment. If you disagree with your peers on a decision, how will that reflect upon both of you? Unlike the private sector where people transition from one job to another regularly, government employees are often part of the same team for an extended period of time. (Just something to consider.)

The End…

Whether or not you have received an Administrative Second Review and reached your desired conclusion, you will receive a Notice of Assessment (NoA). This will summarize the SR&ED investment tax credits (ITCs) allowed or disallowed based on the findings of the reviews.

…or is it?

If the claimant does not agree with the Notice of Assessment, regardless of whether they received an Administrative Second Review, the claimant has the option of filing an objection within 90 days of the date of the Notice of Assessment. This process is handled by the Appeals Branch of the CRA. These next steps – and some of the controversy around them – will be discussed in our next post.

What have your experiences been with the CRA? Have you had success at the local Tax Services Office? Leave us a note below!